Bank of England review proposes tougher standards and more accountability for financial markets

Out-Law News | 16 Jun 2015 | 12:18 pm | 3 min. read

More restrictive regulation is "inevitable" if financial firms and senior individuals working within those firms do not take more responsibility for driving up standards and restoring trust across the wholesale financial markets, a review chaired by the Bank of England has concluded.

The Fair and Effective Markets Review (122-page / 1.9MB PDF) has published 21 recommendations for individuals, firms and regulators across the wholesale fixed income, currency and commodity markets to address recent market abuses and restore public trust. It has proposed extending the new regulatory regime for bank and insurance senior managers to those working with a wider range of instruments, backed by UK-wide qualification and disclosure standards and work to encourage the introduction of common standards at an international level.

Bank of England governor Mark Carney said that "all the main building blocks are now in place for the real markets we need" following publication of the report.

"This is a major opportunity for the industry to establish common standards of market practice that are well understood, widely followed and, crucially, that keep pace with markets," he said in a speech at the Mansion House annual dinner in the City of London. "If firms and their staff fail to take this opportunity, more restrictive regulation is inevitable."

"It is no surprise that the review has identified that market structures, standards of acceptable market practice and internal governance all lacked the rigour and discipline needed for a fair and effective market; with limited reinforcement of standards, short-term incentive schemes and a culture of impunity all adding to the 'ethical drift'," said David Heffron, head of financial regulation at Pinsent Masons, the law firm behind Out-Law.com.

"Some steps have already been taken to put this right with major enforcement actions across a number of jurisdictions and the oversight of key benchmarks being overhauled. However, the review provides the roadmap to the filling of the gaps to provide confidence in the relevant wholesale markets going forward," he said.

Established in June 2014, the Fair and Effective Markets Review was chaired by Minouche Shafik, the Bank of England's deputy governor for markets and banking, and co-chaired by Martin Wheatley of the Financial Conduct Authority (FCA) and the UK Treasury's director-general for financial services, Charles Roxburgh. The review was commissioned to look at and propose improvements to a wide range of wholesale financial markets, with a particular focus on those in which recent allegations of the most serious misconduct have arisen.

The recommendations of the review are based around four principles which, taken together, are intended to restore trust and fairness in financial markets while also boosting their effectiveness. They include making individuals accountable for their own conduct, making firms take greater collective responsibility for market practices, better regulatory coverage and coordinated international action, given the global nature of the affected markets.

The review recommends extending elements of the new senior managers and certification regimes to a wider range of regulated firms, and extending criminal sanctions for market abuse to a wider range of instruments. It has also recommended extending the maximum sentence for market abuse offences from seven to 10 years' imprisonment. New qualification standards would be introduced to "improve professionalism", while new disclosure requirements would prevent previous misconduct from going undetected when individuals change jobs.

A new 'FICC Market Standards Board' would be created, to encourage firms to participate in setting and promoting adherence to standards. The review also recommends the creation of a new statutory civil and criminal market abuse regime for spot foreign exchange. The review's authors hope that this new regime would align with a single global 'code' governing foreign exchange trading, backed by stronger mechanisms to ensure market participants adhere to the code. International authorities should also work together to examine ways to improve the alignment between remuneration and conduct risk across the global markets, and to develop a single set of common trading standards across all fixed income, currency and commodities markets, according to the review.

"It will come as no surprise to those in the regulated industry that the themes of individual accountability, tighter regulation, senior management responsibility and international co-operation are the basic principles behind the review's findings as these have been mirrored across all areas of financial services regulation during recent years," said financial regulation expert Michael Ruck of Pinsent Masons.

"Recent statements from the FCA that larger fines are encouraging culture change in senior management at banks reflect the overall message of this review. Longer custodial sentences, wider criminal sanctions for market abuse, mandatory qualifications and a widening of the senior managers and certification regimes, likely including its reverse burden of proof for culpability, only serve to illustrate the key focus for regulators and prosecutors going forward," he said.